We have retained our Neutral recommendation on
Capital One Financial Corp.
) following the detailed analysis of its first-quarter 2012
earnings results. Further, the acquisition of
HSBC Holdings plc
) U.S. credit card business strengthened our view. This buyout is
expected to enhance the company's position in terms of deposits and
assets, as well as be significantly accretive to its financials.
CAPITAL ONE FIN (COF): Free Stock Analysis
HSBC HOLDINGS (HBC): Free Stock Analysis Report
ING GROEP-ADR (ING): Free Stock Analysis Report
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In May 2012, Capital One closed the HSBC Holdings Plc's U.S. credit
card business deal, which was announced in August 2011. The company
paid $31.3 billion in cash, including $2.5 billion premium for
credit card receivables acquired, to HSBC. Following the
acquisition, the company assumed $28.2 billion of credit card
receivables and $0.6 billion in other net assets.
This acquisition is a strategic fit for the company as HSBC's U.S.
credit card business has a proven track record. In addition to
this, HSBC generates more than half of its revenue from credit
cards. This deal will definitely improve Capital One's credit card
Moreover, Capital One reported first-quarter 2012 earnings from
continuing operations of $1.56 per share, substantially outpacing
the Zacks Consensus Estimate of $1.40. This also compared favorably
with 88 cents earned in the prior quarter and $2.21 recorded in the
Considering the impact of a bargain purchase gain related to the
ING Direct USA acquisition, Capital One reported net income of $1.4
billion or $2.72 per share in the reported quarter. The company
also completed the acquisition of ING Direct, online banking unit
ING Groep NV
), during the quarter. This acquisition is accretive to the
company's first-quarter results.
Higher net interest and fee income were major contributors to the
better-than-expected results. This was further augmented by the ING
Direct acquisition, which positively impacted the company's
financials. However, higher operating expenses slightly marred its
earnings. Moreover, during the quarter, credit quality exhibited
significant improvement; however capital and profitability ratios
On the flip side, increasing non-interest expense remains a key
concern at this point. Though expense management initiatives have
significantly helped Capital One to offset higher credit losses in
the last few years, non-interest expense has been continuously
increasing. Operating expenses declined sequentially in the first
quarter, but it was up on a year-over-year basis. We expect the
integration of current acquisitions and the company's focus on
organic growth through improved loan portfolio and enhanced client
base, will keep non-interest expense elevated through 2012.
Recently, the Federal Reserve unveiled a series of capital
proposals with an aim to ensure that the U.S. banks maintain a
solid capital position and become resilient in stressful times. As
per the proposals, the banks would be required to maintain a total
tier 1 ratio of 7%, which is well above the current requirement of
about 2%. Although Capital One has a strong liquidity position and
expects to meet these stringent requirements, it will be less
flexible with respect to business investments and lending volumes.
We believe that the risk-reward profile of Capital One is currently
balanced; hence, we have reiterated our Neutral recommendation on
its shares. Capital One currently retains its Zacks #3 Rank,
which translates into a short-term 'Hold' rating.